Stern Advice: New ways to kill those student loans

WASHINGTON Wed Jan 18, 2012 2:34pm EST

Graduating students enter the Paladin stadium before U.S. President George W. Bush watches them during the commencement ceremony at Furman University in Greenville, South Carolina May 31, 2008.  REUTERS/Larry Downing

Graduating students enter the Paladin stadium before U.S. President George W. Bush watches them during the commencement ceremony at Furman University in Greenville, South Carolina May 31, 2008.

Credit: Reuters/Larry Downing

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WASHINGTON (Reuters) - By now, the class of 2011 has moved on to real life. There's some good news: Early reports show they are getting better job offers than their older brothers and sisters did when they graduated. The National Association of Colleges and Employers reports that new grads started jobs with an average salary of $41,701, up 2.3 percent from the 2010 level.

But there's some bad news, too. The Class of 2011 is said to be the most indebted ever, with average loan balances near $27,000, according to Mark Kantrowitz, publisher of FinAid.org. Folks who graduated in May started getting bills for their first payments right around Thanksgiving. Ouch.

That's double-ouch for the grads who are still looking for jobs or working in low-paying, no-benefits gigs. But there are, in this era of low interest rates, some ways to cut student loan payments or costs. Here's an overview.

-- Use new tools to understand your options. You can consolidate your loans into one that stretches far out into the future; that will lower payments but raise your total cost of borrowing. Or you can pay extra every month to burn your loans early; that will raise your payments but lower your total costs.

You can see your options in graphic detail at a new website called PaybackSmarter.com (www.paybacksmarter.com.

For example, the typical Washington University in St. Louis graduate owes $27,349 in loans, almost all of it in federal Stafford loans. Standard repayment would require you to pay $314 a month, and you'd end up paying $37,906 in total interest and principal before you finished in 2027. Stretch it out and you can lower your monthly payment to $211, but you'll be paying until 2032 and you'll pay a total of $50,375. Choose, instead, to pay an extra $50 a month, and you'll be done five years early -- by 2022, and pay a total of $37,644.

-- Explore lower payback options for your federal loans. If you can afford to keep up with higher monthly payments, stick with the program you're already on. But if you don't have a job, or it's a low-paying one, consider enrolling in the federal Income Based Repayment plan, which will lower your payments to affordable levels. Get all of the details at IBRInfo.com (www.ibrinfo.org).

-- Don't be in a rush to consolidate, says Kantrowitz. In most cases, it won't save you any money. It may even cost you more if you mix low interest and high interest rate loans. Instead, list all of your loans (including credit card debt) by rate, and aim to pay off the highest-rate ones first, by sending any extra money there. When you're listing your loans, don't assume your low-rate variable rate loans will stay that way forever. Once interest rates rise, a 15-year variable rate loan could end up costing as much as a fixed-rate loan with a rate 4 percent or 5 percent higher, he says.

-- Try to manage private loans. That's harder to do because they tend to have higher rates, a reliance on credit scores and not very many refinancing options. Some options? You may be able to find a cheaper loan via a credit union or at Wells Fargo, which does offer private student consolidation loans, says Patrick Kandianis of SimpleTuition, a rate-shopping site that also runs the PaybackSmarter site. That's because rates have fallen on student loans in the last few years, and now average around 6.5 percent. You probably won't get that refi unless your parents co-sign, but they probably co-signed your private loans in the first place.

-- Get Mom, Dad and Grandma to help. Intra-family loans are really a win-win deal right now, if you're the kind of family that can manage your money, pay your bills, keep an agreement and not discuss it at Thanksgiving. With older folks forced to accept 1 percent or far less on their bank savings, and their grandchildren paying 8.5 percent or more on private student loans, it might make sense for Grandma to cash in a certificate of deposit and pay off the private loan. Pick an interest rate in the middle, write a contract and make payments to her every month. Don't try this if your relative really can't afford to lend you the money, obviously.

-- Keep copies of everything. Graduates and their parents who are farther down this road have war stories about loan terms getting mixed up: consolidations that don't get properly recorded, siblings who get each other's bills, and the like. Sallie Mae might be servicing your federal loans and some private loans, other banks or credit unions could be servicing your private loans. Just making sure you keep careful records of all of those loans, who holds them, and what your agreements are. That will keep you organized, and it will also give you something to cite if you have to argue with the billing department.

(The Personal Finance column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; Linda Stern tweets at www.twitter.com/lindastern.;

Read more of her work at blogs.reuters.com/linda-stern;

Editing by Gunna Dickson)

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